Charges slashed in mobile price war

A price war by mobile phone companies has started in earnest and is likely see the cost of making calls fall drastically.

It all started on Wednesday with the slashing of the inter-connect or off-net mobile phone tarrifs by the Communications Commission of Kenya.

Interconnect tariff is the price a telephone company charges you when you call its customers from another network. The charge has been Sh4.21 but has now been reduced to Sh2.21. The new charges take effect on September 1.

High charges have prevented customers from switching networks, hence restraining competition. Zain on Wednesday fired the first salvo, slashing the call charges by 50 per cent to Sh3 a minute, the lowest in the market.

In an aggressive advertisement which appeared to target the market champions, Safaricom, Zain said its Sh3 charge is without terms and conditions and is permanent, not a promotion. The new charge applies to post-paid and pre-paid customers and they do not need to subscribe.

Although the other mobile companies are yet to respond , the impact of the low interconnect charges is expected to be felt across the industry as phone users migrate from network to network in search of the best deals.

With the cost of making a call falling, the next critical stage in the transition to lower airtime prices will be the introduction of what is known as “number portability”. Under this system, you keep your number exactly the way it is, even if you move from one network to another.

Already, number portability is in the process of being rolled out. Last year, CCK competitively selected Porting Access BV of the Netherlands to provide number portability services. Zain’s new Indian owners, Bharti Airtel, appear to be spoiling for a fight in a market dominated by Safaricom, which controls 80 per cent of the business.

Determined to take leadership

Zain will now charge only a shilling for an sms. “We start a new journey. We know it is long, tedious and tough but we are determined to take up the leadership position in the telecoms market,” said Mr Rene Meza, Zain Kenya’s managing director, on Wednesday, while releasing the new rates.

The rest of the market reacted cautiously, with some claiming that low calling charges might not be sustainable. Mr Atul Chaturvedi, the country manager, Essar Telecom, which owns Yu said, “We do not want to take a hasty decision that becomes unsustainable going forward.”

But he did not rule out a price cut, saying: “We are working on our new price offerings and the same will be communicated to our current and new customers sooner than expected.”

A recent report by UK-based consultants, Analysys Mason, appointed by CCK to study the calling rates in Kenya, recommended a 50 per cent reduction in the interconnection tarrif and then scrapping it altogether by January 2014.

The current rates were introduced by the CCK in 2007 and are modelled on an annual reducing pattern. In 2007, the fees stood at Sh6.4 while in 2008 it stood at Sh5.6 and Sh4.72 in 2009. Cutting the interconnect rates will reduce the ‘club effect’—where people subscribe to a network because they can make and receive cheaper calls to a larger pool of subscribers.

Latest statistics from CCK indicate that Safaricom controls 80.4 per cent of subscribers followed by Zain Kenya with 9.3 per cent while Essar and Telkom Kenya have 7.3 and 2.7 per cent respectively. Zain, Kenya’s second mobile operator with about 1.89 million subscribers has in the past targetted the high-end market but its latest move means it is going for the low-cost market.

Bharti Airtel early in the year promised to inject Sh12 billion into the company, part of which will be used for re-branding and the rest put into network expansion and technology face-lift. The Indian firm acquired 15 Zain operations in Africa for Sh856 billion ($10.7 billion).

And after taking the driver’s seat, Bharti Airtel has now prepared the blueprint to make the deal pay. This, among other radical moves, is a strategy meant to lift the Kenyan unit from loss making (last year Zain reported $46.6 million loss) to profitability.

Safaricom, with more than 16 million subscribers, is not expected to immediately follow suit. Calls within Safaricom are cheap, depending on when they are made, but calling outside the network is expensive. For example on Safaricom’s Super Ongea tariff, the cost of calls to Safaricom numbers fluctuates between Sh0.80 and Sh8, while to other networks it is Sh12.

Last week, Safaricom Chief Executive Officer Michael Joesph said price wars are no longer fashionable in Kenya. “We cannot sell minutes at a loss. Let them reduce rates, but it won’t be long. A business must make returns,” Mr Michael said, adding that what is needed in the industry is effective competition through product innovation.

On Wednesday, Mr Joseph gave no indication whether Safaricom will reduce the cross network call charges. He said he expected competitors to cut call charges in order to attract people to their networks. Safaricom rates are guided by whether it is making business sense, he said. “You cannot lower the costs indefinitely while you are not getting any returns,” he said, adding that it depends on each company’s structure.

“We have to give value to our shareholders. Maybe their objective is to increase volumes, good for them if it pays.” Telkom Kenya deputy chief executive officer Jane Karuku said, “We are currently reviewing the newly recommended termination rates in view of our customer proposition and long-term business model.”

Ms Karuku said CCK should in future play a more vigilant role to ensure customer protection, fair competition among players and long term viability of the industry. “The market penetration in this country is still very low despite the robust network capacity that Kenya currently enjoys,” she said.

The market remained indifferent to Safaricom’s rival price change, with its share price remaining steadily at Sh5.75 same as it crossed on Tuesday. The firm sold 11 million shares. This can be interpreted to mean that investors do not consider the new price war as a threat to Safaricom’s future prospects or fundamentals.